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We had our quarterly review meeting yesterday with one of our research providers (TS Lombard). As you’d expect we ran through their outlook and our positioning in quite a lot of detail. But I thought I’d highlight three of the bigger picture things that stood out to me. The first was this chart which shows real (so above inflation) US equity returns since 1871.
I stared at this one because it is the only chart I have seen recently that does not make US equities look expensive. You can see the dot-com boom and bust as well the 1920s run up and subsequent crash. The recent period actually looks maybe a little expensive but is also pretty business as usual. I would also make the point this chart includes bank runs and financial panics in 1873, 1893 and 1907 as well as World Wars I and II (including nuclear bombs being dropped on civilians), the Great Depression, the Vietnam War, the collapse of the USSR, the 2008 crisis and most recently CoVid. I sometimes hear people say we live in unprecedented times. I would definitely take the times we have today (with Donald Trump in all his pomp) over some that have gone on before.
As to the return, 6.9% real is around 9% nominal or enough to double your money every 8 years. There is some cherry picking here as (especially in the last 15 years) the US has been the worlds best performing market. Our internal long term equity return number is 5.5% real which reflects the fact that non-US returns have been lower. But this is still enough for a 8% or so per annum return which will double your money every 9 years. When a crisis hits, the default instinct is to do something to react to it. This chart gives me comfort that, with the right time horizon, (and even if you don’t) there is a good chance things will work out OK in the end. Human ingenuity to solve problems and progress remains undefeated.
Although the US market has dominated returns since 2008, this year it has been outpaced by the rest of the world. I have written here that we have resisted the temptation so far to chase the out-performance by regions such as Europe (in part because I think we already have enough exposure to capture our fair share of the upside). But this chart caught my eye. It shows the composition of returns year-to-date split between earnings growth, multiple expansion and dividends.
Look at the earnings growth from Europe! (And I am happy to say Europe includes the UK here.) As its valuations are lower, Europe doesn’t need faster earnings growth to out-perform. In-line with the rest of the world will do. TS Lombard continue to recommend overweighting European stocks. Looking at this chart I can see a good reason why.
Finally, I was struck by this chart showing bank base rates in the UK, US and Eurozone.
Simplistically, I think the challenges we face in this country (including structural low growth) are much more like our European neighbours than they are the US. One thing we discussed was the possibility that the Eurozone might ultimately need to raise rates next year. But the other side of this – where the UK cuts rates to move closer to the rest of Europe – also looks likely to me. Given this and the ongoing weakness in UK labour markets, we continue to like gilts, especially at the front end. And if we are right, there may be some better news for mortgage borrowers on the way.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
